Banks that Actually Serve Communities, What a Novel Idea

I had the privilege of speaking on Philanthropy New York’s “Future of Finance” panel last month. My co-panelists and I put forth a series of ideas for fixing the financial sector that all revolved around one common theme: community control. We posited that the problem with finance today is that it has become a tool for the extraction of wealth from local communities. Therefore, perhaps the best way to fix that in the future is by having greater community control over finance itself.

We discussed a wide variety of proposals including creating more public banks like the state-owned Bank of North Dakota; having cities use the power of reverse eminent domain to achieve principal reduction on underwater mortgages through policies like the Community Action to Restore Equity and Stability (CARES) program in Richmond, California; and having community financing of student debt through policies like Pay It Forward in Oregon and the proposed Higher Ed, Lower Debt Act in Wisconsin.

Public banks in particular generated a lot of discussion and excitement. The basic idea is that a city (or state) can establish its own bank that will be owned by taxpayers and that can be capitalized with the city’s (or state’s) own deposits. Instead of paying a big Wall Street bank to hold its deposits and provide banking services, the city could put its money into its own bank and use those funds to both provide community benefits and to help generate public revenue. Public banks could eventually allow for the public provision of a wide range of financial services, including bank accounts for unbanked and/or underbanked communities, local small business loans, affordable mortgages for working class communities of color, and even municipal financial services like bond underwriting.

The appeal of a public bank is that it can accomplish multiple goals at once. First, it can provide the community with safe and sound products (as opposed to predatory products like payday loans and subprime mortgages with balloon payments). Second, it can foster competition that can help lower the prices for banking services at mainline banks. And finally, any money that a public bank takes in would be invested right back into the community.

When Wall Street banks take money out of our pockets, we are left with very little, if anything to show for it because banks do not make most of their money by producing any tangible goods or providing people with necessary services. Furthermore, a very small portion of the money they take in is paid to low- and middle-income earners who are likely to spend their wages locally and stimulate the economy. In short, the overwhelming majority of the money that goes to Wall Street stays there until it eventually makes its way to an offshore bank account. This, in turn, contributes to the vast wealth inequality in our country. But while the money that Wall Street banks extract is forever lost to our communities, a public bank could actually return its profits to the community, either by increasing local lending or by issuing a dividend to the city (or state) government to plug budget holes or to pay for neighborhood services.

There are several organizations including the ReFund America Project at Roosevelt Institute, the Alliance of Californians for Community Empowerment, and Americans for Financial Reform, that are starting to make plans for a multi-year campaign to actually win public banks in a handful of cities. However, these campaigns will require a lot of staff time and resources. We will need veteran organizers who can build strong community support for public banks, experienced researchers who can delve into the policy specifics and do strategic research to support the campaigns, and top-notch communicators who can carry out an effective media strategy. We will need the support of philanthropic organizations to be successful.

If finance is to serve the interests of local communities in the future then it is critical that we advance policies that would increase community control over financial services. Creating more public banks would be one giant step in the right direction.